Taxing question surfaces in slow-growing cottage food industry

April 3, 2013

These fresh-from-the-wood-oven loaves of Owens Dry Lake bread were baked by Jane McDonald, a cottage food operations activist, who attended the March 28 SIHD meeting where the districtâs parcel tax policy was discussed. She hopes that an exemption for home-based food businesses will make it affordable for CFOs to sell their wares at the upcoming Southern Inyo farmers markets and other venues. Photo by Jane McDonald

A new state law, intended to support home-based entrepreneurs start up and flourish, has run into a local snag that currently has new business progress at a near stand-still.
The Cottage Food Law, in effect since Jan. 1, is intended to help home-based food industries operate under a set of regulations that are less expensive, more flexible and more streamlined than that of other businesses.
However, to date, only two Cottage Food Operations, or CFOs, have registered in Inyo County, said Environmental Health Specialist Jerry Oser, both of which have also obtained Bishop city business licenses. It is speculated by both officials and potential entrepreneurs that the hesitation is due to confusion about whether CFOs will be taxed as businesses or residents, a difference of $400 annually.
The March 28 Southern Inyo Healthcare District Board of Directors meeting agenda item, âShould Cottage Food producers be exempt as a business from the SIHD parcel tax,â is what keeps CFOs at bay, said potential home-based baker Jane McDonald, who attended the meeting.
SIHD Chief Operations Office/Chief Financial Officer Lee Barron said that according to SHIDâs Parcel Tax Measure 0505, approved by district voters in 2005, cottage industries could be considered businesses, which means they would be taxed $550 annually. If considered residents, tax would be $150 annually.Thatâs after the various start-up costs involved in becoming a CFO: maximum of $15 for a food handlerâs license; $50 for a Class A or $146 for a Class B permit (which requires a $100 one-time inspection) from the county; and, for those who live in the City of Bishop, an additional $40 (for Class A) or $50 (for Class B) business license.
The SIHD agenda item has been tabled until the April 25 board meeting to give District Legal Counsel Scott Nave time to study the language of the measure and the Cottage Food Law, Barron explained. âWeâll get to some resolution through this process, I hope,â Barron said. âThere has probably been no precedent set (regarding how to categorize CFOs) in any of the other counties yet.â
She indicated Inyo may be the county to set one.
SIHDâs tax schedule is based on tax parcel rolls that it buys from Inyo County Assessor Tom Landshawâs office. âIn that spreadsheet, it shows lot type and use for each parcelâ of land, he said. According to Landshaw, annual taxes for individuals are $50, $100 for houses and $500 for businesses. Therefor, the question is, will CFOs be taxed at $150 or $550 per year?
Landshaw said, âUnder state law, my job is to discover all property and businesses and then determine their taxability and they are taxed accordingly.â He has nothing to do with how SIHD taxes âother than that they buy my parcel roll which they use to determine their tax structure,â he said â getting an exemption is up to SIHD.
On the other hand, the issue is crystal clear to CFO-activist/baker Mark Stambler, who co-wrote AB1616: the Homemade Food Act which became the Cottage Food Law. Stambler said this week that he and fellow co-authors, Oakland-based Sustainable Economies Law Center lawyers, âagree that the law specifically states that CFOs are operating in a private residence,â not a commercial food facility.
âIn fact, there are restrictions on the kinds of modifications you can make to your home kitchen to operate this business,â Stambler said. âAnd, at least in Los Angeles, it is regulated by the local ordinances that apply to home-based businesses.â
In addition, Stambler said, âWe have to go to the health department to get the OK to sell homemade food. Then we have to go to local planning department to let them know we will use our residence to make food for sale. They make sure we know that our businesses cannot disturb our neighbors.â
The Cottage Food Law legalizes the production of non-potentially hazardous food items in home kitchens, help owners of those businesses get needed county certification and permits so they can sell to the customers directly and indirectly at various public venues such as farmersâ markets and restaurants.
When the bill was signed into law on Sept. 21, 2012 by Governor Jerry Brown, Stambler said that the law could potentially promote self-sufficiency, feed the economy, widen small business opportunities and offer the public a âmuch wider array of community-sourced food. We see this as a step forward â not the end goal.â
As things stand now, however, the goal seems quite a long way off. McDonald said that she and other as-yet-unregistered cottage industry hopefuls are holding off on registering. âWeâve gone to the assessor and (SIHD) to ask them to ensure that neither is identifying cottage food producers as businesses which is not within the spirit of the law,â which is to âhelp the rural economyâs under-employed, unemployed and low income people âŠ to keep any fees or overhead (on their home business) very low.â
Using herself as an example, McDonald said a $550 annual tax would be prohibitive to her CFO. By making 10 loaves of bread for market, in âfive bakesâ using âmy old 1970s oven, I would make $1.18 an hourâ in profits taking labor and ingredients into account. That figure doesnât include utilities or the business tax. For some CFOs, âit would be very hard to make very much money,â she said.
Still thereâs no lack of interest in establishing CFOs, McDonald said. âAbout a 100 people showed upâ at the two November 2012 CFO workshops, held to explain the law and how to operate within it.
As an aside and to be fair, said McDonald, âItâs important that we all are supporting the hospitalâs fight for its life and have written letters, etc. regarding reimbursements,â referring to Medi-Cal cuts and retroactive reimbursement with which SIHD is now faced and which could potentially close the entire district (See the Tuesday, April 2 issue of The Inyo Register). âCottage food is a drop in their bucket.â
Inyo County Environmental Health Department Director Marvin Moskowitz said he attended the SIHD board meeting to provide information as needed. âThey feel like their hands are tied by a voter-approved tax schedule,â and they want to pursue avenues to relieve the stipulation.
Moskowitz said he queried Inyo County Counsel Randy Keller about the taxation issue, as well. âEverything is under legal review at this time.â
McDonald said she hopes a favorable precedent is set before the Owens Valley Growers Cooperative and Eastern Sierra Certified Farmers Market start their new farmers market, to be held alternately in Independence and Lone Pine on Friday nights. The first one will be held on May 17 at the Mairs parking lot in Independence and the second on May 24 at Metabolic Studios IOU gardens in Lone Pine.
Without cottage industry participants, McDonald said, the all-local-produce vendors will not be joined by those who make âtortillas, pan dulce, tamales and bread,â as she does.
There seems to be a lot of support for the CFOs. Barron said she hoped the Cottage Food Law language would prevail. District 4 Inyo County Supervisor Mark Tillemans said, âI support the Cottage Food Law, farmers markets, community gardensâ and that sort of industry. âI personally feel they should be taxed at the residential rate.â District 5 Supervisor Matt Kingsley said, though the tax issue had only recently come to his attention and he needed more time to study it, he is âreally supportive of the whole Cottage Food initiative. We donât want to put barriers up.â